When I am purchasing a property either for myself or with my student/partner, we determine which exit strategy is the best for both parties. Knowing whether you want to wholesale a property for a small profit or rehab/retail it for a big profit is important. Many investors start off with wholesaling the properties because they either don’t have a money lender or partner to help them rehab/retail the house and sell it for a bigger profit. If this is you, then I believe you really should find a partner or money lender so you have more than one exit strategy.
When you purchase a short sale, some of the lenders will put a hold time for the new buyer requiring them to hold the property for 30, 60 or 90 days before they can resell the property for a profit. In addition, they may tell you that you can only make a certain amount of money on the property if you sell it earlier than 90 days. Holding doesn’t bother my student/partners or myself because we normally choose to rehab the property and retail it for a higher profit.
Let me tell you about a home that a student/partner and I purchased. It was a short sale on a home in St. Petersburg, FL that was vacant for about 7 years. The area was an up and coming neighborhood and the two houses directly across the street from the home sold for $195,000 and $240,000 which both are smaller, only 2 bedrooms, one car garages and no pool. The area was known for termites. We replaced all rotten wood, treated the home and provided the buyer with a 1 year termite bond. So … after negotiating the deal for some time, we purchased the 3 Bedroom Home, 2 Bathroom, and Pool with approximately 1500 Square Feet for $69,900.00. The garage was already converted but needed repairs. This home was built in 1950 and needed everything from Roof, Electrical, Windows, Air Conditioning, and Pool repair. The repair budget when we started was about $65,000 and we ended up around $75,000. The short sale lender placed a 90 day hold period on the Deed so the Buyer could not sell it to a mortgage buyer for a period of 91 days. Since this was a huge rehab with a large profit we didn’t mind fixing up the home.
So what did we do to the home to get it move in ready? We were trying to keep the costs down and were going to keep the existing roof that had about 3 to 5 years left but decided to spend the additional $8,000 to replace the roof. We received multiple quotes from electricians ranging from $3,700 to $40,000 to upgrade the electrical box and replace all the switches and plugs. We ended up paying around $3,200 for the electrical. The air conditioning unit needed to be replaced so we contacted an a/c contractor associated with the REIAs and got a great deal of $5,100 which included 5 new runs, new box, new air handler and new compressor. If we didn’t have to add the additional runs and new box, we could have gotten it for only $3,500. We had to get hurricane glass windows which were almost double the amount of the windows of non-hurricane glass windows! We used Home Depot which was American Craftsman and the cost was 2 times cheaper than the quote we received from ABC Supply. We painted the vinyl siding of the house which painting any house gives a great curb appeal. We had to replace almost all the flooring in the house except we refinished about 600 square feet of wood flooring for $2,600 in the living room, dining room, hallway and 2 bedrooms. They were beautiful. It would have been cheaper if we didn’t want them to replace the bad wood in some of the rooms and two closet floors. We tiled the family room, 2 bathrooms, kitchen, 3rd bedroom, hallway, utility room and office area. We needed all new doors, hinges, knobs, some baseboards, light fixtures, ceiling fans, kitchen cabinets, granite counter tops, bathroom cabinets, new shower tile, new tub and surround, all new faucets, toilets, mirrors and more.
The outside wasn’t in too bad of shape but needed some TLC. The wooden fence around the backyard needed minor repair, we only replaced the bad pieces and power washed the fence. The backyard we covered completely with red mulch because there was no grass. The front yard, we just raked and put red mulch and plants around the flower bed area. The pool was another story. We had it acid and power washed and it still looked yellowish in spots based on the white body color. We received quotes from $3,900 to $9,800 to just refinish the body. My partner/student’s son works for a company that purchases real estate owned properties in bulk and he told us that they were just painting the inside body of the pool. We checked into purchasing the correct paint for the pool and with material and labor it costs us $1,300 to refinish the pool. The paint life line for the pool was for 5 to 7 years.
When we first started rehabbing the property the best comparable we had was a house that sold for $220,000. After rehabbing the property for 2 months, the values of the properties increased and we are able to list the house for sale for $264,900.00. We could have spent more money on the property but as an investor, you must understand that you are not going to live in the home and this is a business. So save something for the new homeowner to do! When we sell this property, the profit to be split will be between $70,000 and $90,000 depending on if we receive our list price and/or if we have to contribute to the buyer.
If we were going to wholesale this property we would have wholesaled it to a seasoned investor with a profit of $30,000.00. Any rehab over $30,000 is very hard for a new investor and we figured without the roof that rehab cost was above $65,000. So, I am asking you was it worth the hold time and extra $40,000 to $60,000 profit to buy, fix and resell?
Based on this article, I hope I have persuaded you to start going after pre-foreclosures and retailing for bigger profits. You can also find pictures of the house on my facebook account if you would like to see the finished product.
Happy House Hunting!!!